A closely watched appeals court case that could determine whether investors may sue firms over allegedly
faulty disclosure for auction-rate securities has pitted the Securities and Exchange Commission against a broker-dealer group.

The SEC and the Securities Industry and Financial Markets Association have each filed opposing friend-of-the-court briefs in the
litigation, which is pending before the U.S. Court of Appeals for the Second Circuit in New York City.

The appeals court must decide whether to reinstate a securities fraud class-action suit filed by investors against Merrill Lynch &
Co., now Bank of America Merrill Lynch. A lower court dismissed the case last year after deciding Merrill’s disclosures were
sufficient.

In its amicus brief, filed late last month, the SEC contends Merrill’s ARS disclosures were inadequate. But SIFMA takes the
opposite stance, claiming the disclosure was appropriate and the lower court’s decision against the investors, led by Colin Wilson,
should stand.

“It is an irrefutable fact that 'the market’ was well-informed that broker-dealers participated in ARS auctions for their own accounts,
including trades made for the explicit purpose of avoiding failed auctions when demand would otherwise fail to meet the supply
offered for sale in the auctions,” SIFMA wrote.

The briefs come as a three-judge panel, which heard oral argument in February, is expected to weigh in soon — the first federal
appellate decision stemming from the auction-rate securities market’s 2008 collapse. Similar class-action complaints have been
dismissed by federal courts across the country, stirring interest in the appeals court’s decision.

The plaintiffs allege Merrill manipulated the ARS market by placing bids for its own account, known as “support bidding,” to
prevent auctions from failing. They also claim Merrill failed to disclose its intervention to investors.

Chief Judge Loretta Preska of the U.S. District Court for the Southern District of New York tossed out the case last year for failing to
state a securities fraud claim. It said Merrill had revealed its market participation to the public, including support bids, “with a
degree of credibility and intensity necessary to counterbalance any misinterpretations resulting from the alleged manipulation.”

In March, the appellate court asked the SEC to submit a friend-of-the-court brief addressing five questions about the adequacy of
Merrill’s disclosures and the effect of such disclosure on the plaintiffs’ market-manipulation claims.

Securities lawyers and industry groups took notice.

“When the Second Circuit says we want the opinion of the SEC, it’s potentially a game changer,” said George Carpinello, a partner
at Boies, Schiller & Flexner LLP in Albany, who represents Dow Corning Corp. in a separate, non-class-action ARS case against
Merrill, also pending before Judge Preska.

In its brief, filed late last month, the SEC said Merrill’s disclosures were not sufficient as a matter of law to bar investors from
claiming market manipulation.

In particular, the SEC noted, Merrill’s 1997 offering documents for the securities purchased by the investors said in certain
circumstances holders “may be unable to sell their shares” and may not have liquidity. In addition, the commission said, beginning in
2006, Merrill’s website contained disclosures saying there “may not always” be enough bidders to prevent auction failure and such
failure was “possible” if Merrill did not bid.

These disclosures, the SEC said, suggested some auctions had enough independent demand to prevent failure — which, the investors
alleged, Merrill knew not to be the case.

“In light of plaintiff’s allegations that Merrill knew there was no such demand, and concealed that fact through its practice of placing
support bids in every auction with knowledge that its failure to do so would lead to certain auction failure and the collapse of the
ARS market, Merrill’s disclosures were not sufficient,” the commission wrote.

Wilson bought his securities on July 17, 2007, on E*Trade.

An attorney for the investors, Jonathan Levine of Girard Gibbs LLP in San Francisco, said if the appeals court follows the SEC’s
views, the district court’s opinion “should be reversed.”

One observer, who advised the SEC in an ARS-market investigation from 2004 to 2006, agreed.

“I think the SEC made clear what people should have known: that disclosure requires you to tell what you are actually doing, not
what you might do,” said Joseph Fichera, chief executive officer of Saber Partners LLP in New York. “You can’t just sort of say
something generic.”

Two weeks after the commission submitted its brief, SIFMA filed its friend-of-the-court brief, asking the panel to affirm Preska’s
decision.

According to SIFMA, the plaintiff could not successfully claim market manipulation because widespread disclosures — in offering
documents, newsletters and national news articles — informed investors that broker-dealers’ ARS-market participation “affected the
natural interplay between supply and demand.”

Specifically, the self-regulator wrote: “Such open and 'routine’ practices hardly reflect an intent to defraud ARS investors.”
Attorneys for SIFMA and Merrill did not respond to requests seeking comment.

SEC spokesman, Kevin Callahan said: “At the request of the court we filed a brief addressing a disclosure question, and in our
response we made clear our view that it is not sufficient to disclose the risk that an event may happen when according to the
plaintiff’s allegations it is known for a certainty that the event has happened or will happen.”

Bank of America Merrill spokesman Bill Haldin said Merrill filed a written response to the SEC’s brief on July 8.

In its response, Merrill said the SEC sought to transform the investors’ market-manipulation claims into a case about Merrill’s
“purported duty to warn customers of negative market conditions in the fall of 2007 and early 2008.” Merrill also urged the appellate
court to uphold the lower court’s ruling.

The friend-of-the-court briefs are the latest chapter in a string of efforts, among regulators and private litigants alike, to police the
ARS market and seek compensation for investors harmed by the market’s collapse in 2008.

In May 2006, the SEC settled a securities fraud case against 15 broker-dealers, including Merrill, for conduct including the failure to
disclose adequately to investors their efforts to intervene, between January 2003 and June 2004, in the then-$200 billion ARS
market. The firms, which did not admit or deny liability, paid more than $13 million in penalties, based on their relative market share
and conduct.

In August 2008, six months after the ARS market collapsed, the SEC announced a preliminary settlement with Merrill that would
enable investors who purchased ARS through the firm to receive up to $7 billion to restore their losses and liquidity. Merrill agreed
to buy back at par ARS from retail investors who bought securities from the firm before the market tanked. Merrill also entered into
ARS settlements with state regulators in 2008.

Meanwhile, plaintiffs’ class-action lawyers filed a series of securities-fraud lawsuits in federal courts across the country, stemming
from the market’s collapse. The suits include investors who did not participate in, or were not eligible for, the firm’s settlements
with federal and state regulators.

Nine investor suits against Merrill, including cases originally filed in Kentucky, Louisiana and Massachusetts, were consolidated
before Judge Preska.

Even securities lawyers not involved in the appeal say they will be watching.

“Obviously whatever the Second Circuit says about this market is going to be significant,” Carpinello said.